How Can Countries Benefit from the Presence of Multinational Firms ? Evidence from EU Member Countries and Some Thoughts on South East Europe

Bernhard Dachs | AIT Foresight and Policy Development | Research, Technology and Innovation Policy

Foreign-owned firms – heroes or bad guys of the economy?

My presentation will focus on co-operation between foreign-owned firms (FoFs) and universities in South-Eastern Europe (SEE).

The activities of foreign-owned firms are often subject to discussions For some, attracting FoFs are the key to economic growth, in particular in

emerging economies …while critics of globalization associate FoFs with decreasing social standards,

rising environmental pollution and unethical behavior

This presentation focuses on the implications of the presence of foreign-owned firms for science, technology and innovation (STI) policy

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Characteristics of foreign-owned firms in an STI perspective

FoFs are often active in R&D intensive sectors Pharma, computers, information technology, automotive …

Multinational firms often possess valuable knowledge and superior resources (Dunning, 1988, Markusen, 2002) Exploitation of this knowledge is the very reason why they become multinational

FoFs are embedded in a intra-firm networks (Ghoshal, Bartlett, 1991) At the same time, FoFs are also members in networks in their host countries

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Why FoFs are attractive for SEE countries?

R&D of FoFs can substantially raise aggregate R&D expenditure of countries in a short time The Austrian experience, but also Ireland, Iceland, …

FoFs are important employers for researchers and university graduates

Embeddedness in a double network makes FoF a channel for international technology transfer Knowledge and information spillovers from FoFs to domestic organisations The channels include worker mobility, innovation co-operation, supplier-customer-

relationships etc.

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Challenges for countries from the presence of FoF

Loss of control over domestic innovative capacity and commercialisation

Less basic, strategic research, less radical innovations, more adaptation

Competition for talent harms university research

Race to the bottom for R&D subsidies and unethical behaviour

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Source: UNCTAD, 2005

Empirical evidence of Science-industry relations

To what extend do FoFs co-operate with domestic universities?

Two conflicting hypotheses: FoF can rely on superior internal knowledge, so there is no need to co-

operate On the other hand, they have more resources for co-operation than many

domestic firms, because they are larger, have more R&D staff...

Data from the Community Innovation Survey 4, a survey on innovative activity in the European Union

Data covers the period 2002-2004

0%

10%

20%

30%

40%

50%

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70%

80%

DK FI SE CZ SI HU FR SK NO EE LV LU IS ES GR PT RO BG IT

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domestic firms

foreign-owned firms

Share of co-operating firms, all partners, 2002-2004

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Domestic university co-operation, 2002-2004

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0%

5%

10%

15%

20%

25%

DE NO BE SK CZ HU EE GR PT ES LT SI IT LV BG

Per

cent

age

of a

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nova

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s Foreign-owned firms Domestic firms

Co-operation with universities abroad, 2002-2004

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0%

1%

2%

3%

4%

5%

6%

7%

8%

DE BE NO SK LT LV CZ EE BG HU PT SI ES IT GR

Per

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Domestic Foreign-owned

Summary of the empirical results

Co-operation among firms in South-eastern European countries is lower than in many other European countries, in particular in BG and RO A good argument to promote co-operation

Slovenia performs better than all other countries in the region Already above EU average in some indicators

Foreign-owned firms are actively seeking co-operation and have a higher willingness to co-operate than domestic firms Not in domestic science-industry co-operations but with universities abroad

Why do foreign-owned firms perform so good?

The advantages of foreign-owned firms are not because of their ownership status (alone)

Regression analysis reveals that FoFs are simply better endowed for university/industry co-operation (Dachs and Pyka, 2009) they are larger, have permanent R&D, a higher capacity to absorb knowledge and

operate more often in science-based sectors moreover, they have more management and financial capabilities and can spread

risks over more projects

The differences are mainly caused by small, non-affiliated firms

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What could SEE countries do to attract foreign R&D?

Various studies on location decisions of FoFs have revealed some principles of ‘good policy’ (OECD, 2005, UNCTAD, 2005)

Stable economic framework vs. special incentives Studies have shown that stability is more important than special incentives “Green field” investments in R&D without existing production are very rare Incentives, however, can be decisive if firms choose between two countries

Equal treatment of foreign-owned and domestic firms obligatory in EU competition law... but also justified because research has shown that differences between Fo and

domestic firms are due to special endowments and not due to the ownership status

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What could SEE countries do to attract foreign R&D?

Policy should promote the innovative capacities of both, foreign-owned and domestic firms Provide funds to overcome financial, risk and capacity obstacles to innovation Enable them to become suppliers for foreign-owned firms Strengthen IPR protection

Improve university research and training Availability of skilled personnel is a major incentive for FoFs to start R&D in a

country Programmes to promote R&D co-operation in general

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Thank you for your attention

Bernhard DachsResearch, Technology and Innovation Policy,Department Foresight and Policy DevelopmentAIT-Austrian Institute of Technology